Blockchain could save banks $12 billion a year

2017 is already showing signs of how blockchain will develop and shape financial services in the near future. Banks are working together on trade finance applications based on distributed ledger technology (DLT) and recent reports show that blockchain will have more of an impact – and will mean more savings for banks – than previously thought.

Reduced infrastructure costs for banks

A study by Accenture and McLagan (part of Aon plc) suggests that blockchain technology could reduce infrastructure costs for eight of the world’s 10 largest investment banks by an average of 30 per cent. This could mean annual savings of $8-12 billion, the report said. McLagan's Chris Blain said: “This joint analysis with Accenture suggests that blockchain technology could significantly change the cost structure of investment banks over the next decade. The technology represents a potentially important breakthrough at a time when leading investment banks are looking at myriad ways to rebuild their returns on equity.”

Savings in four areas

The Accenture/McLagan report explains that blockchain-based systems could be developed to reduce the need for banks to maintain their own databases of transactions, customer information and other reference data, and simplify the processes of reconciliation and confirmation of data with counterparties and clients, which is complex, costly, and labour-intensive. Blockchain technologies could enable investment banks to move from maintaining a separate, fragmented database structure to a shared, distributed database that spans organizations. The report identified the following areas where DLT could reduce costs for investment banks:

finance-reporting costs could shrink by 70 per cent as a result of the optimised data quality, transparency and internal controls provided with a shared, single source of verified data;

compliance costs could drop by 30-50 per cent at the product level and on a centralised basis due to the improved transparency and auditability of transactions;

centralised operations supporting functions such as KYC and client-onboarding could bring 50 per cent savings by establishing processes that are more efficient at managing digital identities and by “mutualising” – or sharing – a single source of client data securely across multiple banks; and

business operations such as trade support, middle office, clearance, settlement and investigations could also lower their operating costs by 50 per cent by reducing or eliminating the need for reconciliation, confirmation and trade-break analysis.

Material impact in 3-5 years

A report from McKinsey last week also underlined how blockchain technologies are set to impact banking and insurance. It found that “most people in the industry already believe that blockchain technology will “have a material impact” within three to five years”.

The study suggested that:

20-30 proof-of-concept use cases for blockchain technology could be tested in 2018 and 10-20 successful business cases could survive and be deployed commercially by late 2020;

in a survey of 200 companies, McKinsey found 64 different use cases for blockchain;

cross-border B2B payments are the biggest use case for blockchain, which McKinsey said could generate saving for banks valued at $50-$60 billion;

trade finance use cases could lower costs and speed up turnarounds to boost value by $14-$17 billion;

McKinsey also produced this list of 10 things you should know about blockchain:

European banks collaborate on trade

A recent example of DLT being applied in financial services is the announcement that seven banks plan to develop a blockchain platform that aims to make domestic and cross-border commerce easier for European small and medium-size (SME) businesses. The group – Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale and UniCredit – says the platform, called Digital Trade Chain (DTC), is ground-breaking. It is based on a prototype trade finance and supply chain solution originated and already tested by KBC. The DTC provides an online/mobile application that connects the buyer, seller, their banks and the transporter in a trade transaction, allowing them to manage and track international transactions.

CTMfile take: These studies by Accenture, McLagan and McKinsey show that blockchain-based platforms will bring very significant savings to the sectors of trade finance and cross-border payments services. The question is whether corporate customers will also benefit from these cost savings.